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Analysis of uncertainty and risks in decision making
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This paper considers “how, when and why” a firm ought reasonably suspect insolvent trading via exploration of areas of law, management, psychology and economics. Factors given consideration include the difference between risk and uncertainty, the imperfection of market information, the risk appetite of entrepreneurs, the impact of corporate culture on self-awareness and finally criteria for assessing proximity to insolvency from both a case law and a common-sense perspective.
An essential difference between risk and uncertainty is the ability to quantify and therefore manage risk, since risk is associated with measurable repeatable events and accessible to a probabilistic analysis. Uncertainty on the other hand stems from unique events, which may be foreseeable but are certainly unpredictable (Wennekers). A wide variety of management models exist for managing risk (Net Present Value, Capital Asset Pricing Model etc.) but all assume away the element of uncertainty. The “how” of managing uncertainty will be a subjective matter and depend greatly on the individual entrepreneur or manager. At this point it is easy to see a potential divergence between courts and businessmen, unless courts are able to reasonably but prudently incorporate the typical entrepreneurial outlook. Entrepreneurs are “more optimistic”, “less averse to risk” and likely to “dispose of relevant information reducing uncertainty” (Wennekers). Whilst some latitude might be given by the courts to this mindset, an element of dispassionate analysis should remain. Where conventional management theory allows, the level of uncertainty in the firm’s marketplace should be assessed and included in any decision on potential insolvency. Where “uncertainty levels are low, th...
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Morrison, D. 2002. When is a company insolvent?. Insolvency Law Journal. Vol. 10, Mar. 02, p. 19-21
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Wennekers, S., Thurik, R., Van-Stel, A., & Noorderhaven, N. 2007. Uncertainty avoidance and the rate of business ownership across 21 OECD countries, 1976-2004. Journal of Evolutionary Economics. Vol.17,Iss.2;p.133
Harvard Business School case 274-116. Cooper Industries, Inc. Retrieved on August 31, 2008, from University of Phoenix, Resource, FIN/545 web site: https://mycampus.phoenix.edu/secure/resource/resource
Sachs, A. (2010). Management, Plain and Simple. Time, 175(15), Global 4. Retrieved from Academic Search Complete database.
Brealey, Richard A., and Myers, Stewart C. Principles of Corporate Finance. Sixth ed. McGraw Hill, New York, © 2000.
The Body Shop International case is an interesting case study into the miscommunication of owners and stockholder interests with regard to financial conditions. Anita Roddick, the founder of The Body Shop had no financial experience and thought that all she needed to do was expand her business and the financing would take shape as she developed her business. While Anita’s product concept of a natural skin-care line was good; her lack of experience in financial matters took its toll on her business.
Whetten, David A., and Kim S. Cameron. Developing Management Skills. Upper Saddle River: Pearson Education, 2007. Wikipedia, Contributors. Forming.
The re-use of an insolvent company is protected by UK insolvency law. It helps to protect the interests of investors and creditors are not damaged by a lack of transparency relating to the director's involvement with an insolvent company, and continued involvement with its phoenix.
Robbins, S.P., & Coulter, M. (2009). Management (10th ed.). Upper Saddle River, NJ: Pearson Prentice Hall.
Obviously, financial establishments can endure breathtaking misfortunes notwithstanding when their risk management is top notch. They are, all things considered, in the matter of going out on a limb. At the point when risk management fails, be that as it may, it is in one of the many fundamental ways, almost every one of them exemplified in the present emergency. In some cases, the issue lies with the information or measures that risk directors depend on. At times it identifies with how they recognize and impart the risks an organization is presented to. Financial risk management is difficult to get right in the best of times.
Robbins, S. P., & Coulter. M. (2014). Management (12th ed.). Retrieved from: Colorado Technical University eBook Collection database.
A banking failure of Lehman Brothers had considerable negative influence on economics and financial markets worldwide. Beginning from the point what it could have been/be done, several authors agree that LB’s bankruptcy could have been/be anticipated (Christopoulos et al., 2011; Maux and Morin, 2011). They perceive a major problem in unwillingness or incapabil...
One of the key areas of long-term decision-making that firms must tackle is that of investment - the need to commit funds by purchasing land, buildings, machinery, etc., in anticipation of being able to earn an income greater than the funds committed. In order to handle these decisions, firms have to make an assessment of the size of the outflows and inflows of funds, the lifespan of the investment, the degree of risk attached and the cost of obtaining funds.
Globalization and economic slowdown has made businesses subject to a great deal of uncertainty. In this time of rapid change, economies worldwide change rapidly, new markets open up and old ones change, and demand for products is often uncertain. As such, businesses must be flexible and adaptable in the types of methods that they use...
Insolvency can be defined as the situation whereby a debtor lacks the ability to settle the debts that they have. This definition can also include situations in which companies have numerous liabilities, most of which are greater than the assets that they have (Adams 2002, 70). The type of insolvency that regards cash flow complications often incorporates the inability of firms to settle their debts whenever they are due. The other type of insolvency that regards the balance sheet incorporates net assets that reflect negative figures, thereby representing a scenario where liabilities are greater than assets. It is worth mentioning, that insolvency is not synonymous with bankruptcy. This is because bankruptcy is a form of insolvency that can only be enforced by the courts of law and requires that legal precepts are instituted with the intention of resolving the challenge of insolvency.
Over the past hundred years management has continuously been evolving. There have been a wide range of approaches in how to deal with management or better yet how to improve management functions in our ever changing environment. From as early as 1100 B.C managers have been struggling with the same issues and problems that manager’s face today. Modern managers use many of the practices, principles, and techniques developed from earlier concepts and experiences.
Robbins, Stephen P., David A. DeCenzo, and Mary K. Coulter. Fundamentals of Management: Essential Concepts and Applications. 7th ed. Upper Saddle River, NJ: